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What is an Offset Mortgage?

What is an Offset Mortgage?

23rd Nov, 2022

In simple terms, an offset mortgage links your mortgage to your savings account and the value of your savings is deducted from your mortgage balance so you only pay interest on the remaining balance, which reduces your overall monthly payments.  

The value of your savings is not affected by using them in an offset mortgage, it is simply a way to make your savings work better for you. As an example, if you had £25,000 in savings and a mortgage of £200,000, you would only pay interest on £175,000, which would reduce your monthly payments at any interest rate.   

It is not possible to earn interest on the savings that are used to offset the mortgage but because you would usually pay more interest on a mortgage than you would earn from a savings account, this is still, usually, very cost effective. However, when calculating if an offset mortgage would work for you, it is important to determine how much money you would save on your mortgage payments versus how much interest you could earn on your savings pot.  

As with a standard mortgage, there are lots of different types of offset mortgages available including fixed rate, tracker and interest only, just to name a few.  

The savings you use to offset your mortgage can still be accessed but once the money is withdrawn from the savings pot, it reduces the amount you are able to offset against your mortgage debt so your monthly mortgage payments would increase. Some lenders also have a minimum balance requirement for the savings pot used to offset the mortgage.  

An additional benefit of an offset mortgage is that it can be a good way to help a family member get onto the property ladder, as some lenders will allow you to offset your savings against someone else’s mortgage such as a child, or grandchild, who is a first-time buyer. Equally, offset mortgages may work well for self-employed individuals and limited company owners who save up a significant sum of money on an annual basis in order to pay their tax bill.  

It is worth considering some other aspects of an offset mortgage, such as the fact that they do tend to have higher interest rates as you pay a premium for having the flexibility of the features of the mortgage. Equally, it may actually be more cost effective to use your savings to pay off part of your mortgage to reduce your overall loan to value to give you access to better overall mortgage deals.  

If you’d like to know more about offset mortgages, how they compare to other options in suitability to your personal circumstances, contact us today for a no obligation chat with one of our experienced mortgage advisors.